Understanding Nomura Sukuk Al-Ijarah

0
TABLE OF CONTENT
NO. CONTENTS PAGE
1 INTRODUCTION 2 - 3
2 WHAT IS SUKUK AND ITS IMPORTANCE 4 - 5
3 THE CONCEPT OR STRUCTURES OF SUKUK 6 – 1-
4 TYPES OF SUKUK 11 - 18
5 DIFFERENTATION BETWEEN SUKUK AND BOND 19 - 21
6 OVERVIEW OF NOMURA SUKUK AL-IJARA 22 - 23
7 STRUCTURES OR CONCEPT NOMURA SUKUK AL-IJARA 24 - 26
8 ISSUES OF NOMURA SUKUK AL-IJARA 27 - 28
9 RECOMMENDATION 29
10 CONCLUSION 30 - 31
11 REFERENCES 32 - 33

1
1.0 Introduction
Islamic Capital Market is a long term market transactions are carried out in ways
that does not conflict with the conscience of Muslims and Islam religion. It follows the
religious law or Shariah compliance that is free from any activities prohibited by Islam
such as usury (riba), coercion, ambiguity (gharar), and gambing (maysir). The Shariah
Advisory Council (SAC) was established in May 1996 as advisor of the Comission on
Shariah matters especially in Islamic Capital Market.
The Malaysia Islamic Capital Market has experienced phenomenal growth and raised
the bar globally for product innovation and financial intermediation. Islamic financial
system is running with conventional system has seen a continuous development in the Gulf
cooperation council (GCC) countries. While it has also get success to attract financial
centers of world big countries such as UK, USA, France, China, Italy, Korea, Singapore
and Japan. Furthermore, this market comprises the Islamic equity sector and fixed income.
Various Islamic Capital Market products are available especially for Muslims who only
seek into invest and transact in it such as Islamic Unit Trust, Sukuk, Shariah Indices and
warrants.
According from this assignment, we are given the task to elaborate and analyze
about Nomura Sukuk Ijarah. Based on the case study that we received, we will analyze
how, why, what, and when Nomura Holdings applied Sukuk Ijarah as their business

2
structures. As we know that Japan is a non-muslim country but why the founder interested
to choose and trust Shariah Compliant product can give profit in their company.
In present’s capital market, sukuk ijara is considered as top priority of investor of
investors financing. Today, sukuk ijara are floated by governments with some business
entities. Mostly, ijara structure is followed in the countries such as Middle East, Malaysia,
Germany and others.
In this paper, we provide a comprehensive review of the Nomura Holdings on
Islamic products development, operations in practice and issues of sukuk ijara. Beforehand,
we discuss what is sukuk and its importance, study of some structures and sukuk types
and we also analyze the different of sukuk and bond that are currently utilized by Islamic
Financial Institutions. Finally, we will give a recommendation and conclusion about our
study. We will enlist references for further reading.

3
2.0 What is Sukuk and its importance?
A number of different Islamic financing techniques and products have been developed in
accordance with the above principles and one of these is the Sukuk. Although the Sukuk is
sometimes referred to as the Islamic bond it is better described as an asset based investment as the
investor owns annual divided interest in an underlying tangible asset which is proportionate to his
investment. The Sukuk certificate evidences this ownership interest. Money raised by the issue of
the sukuk note are used to invest in an underlying asset, a trust is declared over that asset and
thereby the certificate holder will own a beneficial interest in that asset in proportion to its
investment and is therefore entitled to all the benefits that entails including a proportion of the
return generated by that asset.1
Sukuk, which is plural for sakk, refers to an investment certificate. It could also mean a
trustee certificate. Sukuk were tradable instruments in Muslim societies in times past. Sukuk, as
fund-raising products, have often been referred to as Islamic bonds and subjected to comparison
with conventional bonds. While the objective of a sukuk issuance may be the same as that of a
bond that is, to raise financing and there are many differences between two instruments. To begin
with, one has to keep in mind that there is no such a thing as “debt” financing in Islamic finance.
The only debt in Islam is qard al-hassan, which is a benevolent loan and that is, one that
1
Clifford Chance, Introduction to Sukuk, Clifford Chance Limited Liability Partnership September 2006. Pdf. page 1

4
does not have a compulsion on repayment. Given this, while sukuk are intended to raise external
financing just like bonds, their operational, legal and regulatory frameworks are vastly different.2
Sukuk are trust certificates or securities that are asset-backed and Shariah compliant. Sukuk issuers
include sovereign governments, corporations, as well as financial institutions.
Sukuk securitization distributes risk by pooling debt instruments and then issuing new securities
backed by the pool. This in turn enables an originator to divest their assets and generate the needed
funds (Jabeen).3
Securitization is a structured finance process that distributes risk by aggregating debt
instruments in a pool, then issues new securities backed by the pool. The securities resulting from
this process are termed Asset-Backed Securities or ABS. It is worth nothing the credit quality of
securitized debt is non-stationary due to changes in volatility that are time and structure
dependent.4
2
Obiyathulla I. B. and A. Mirakhor (2013), Sukuk and Sukuk Market: What are Sukuk?,Islamic Capital Markets A
Comparative Approach, John Wiley & Sons Singapore Pre. Ltd, Singapore. Page 172 - 173
3
Jabeen, Zohra, Significance of SukukSecuratization for Banks Structuring Risk Regulationand Pricing, Institute of
Management Sciences, Peshawar, Pakistan, pdf.
4
Mona R. El Shazly and PragyaTripathy, Sukuk Structures, Profiles and Risks, Columbia College. pdf. page 3

5
3.0 The Concept or Structures of Sukuk
AAOIFI has specified 14 categories of permissible Sukuk and a number of techniques that can be
employed to structure a Sukuk transaction. The choice of structure type will depend on various
factors, including the character of the underlying assets, taxation and regulatory considerations,
the targeted investor base and the views of the Shari’ah scholars who must approve the sukuk
issuance. As a result of the AAOIFI Statement, the most commonly used sukuk structures in the
current market are ijarah, murabaha and mudarabah-wakala.
The popularity of the musharaka and the mudarabah sukuk structures has declined
disproportionately when compared to other structures in recent years, as a consequence of the
AAOIFI Statement, which place distriction on the requirement that sukuk issuers buy back the
sukuk at their face value and prohibited mandatory interest-free loans or liquidity facilities that are
typically used to make up for any shortfalls in income from the underlying sukuk assets.
Regardless of the structure chosen, however, the entity seeking to raise finance (the
originator) will typically incorporate a wholly owned financial intermediary (an SPV) and transfer
title to the underlying assets to the SPV. The SPV will then issue sukuk and use the funds raised
to pay the originator for those assets. In theory, the sukuk assets are therefore separate from the
originator’s remaining assets. In practice, however, the originator continues to use the assets (for
instance under a lease in the ijarah), or to manage the assets (for instance under a musharaka or
mudarabah).

6
Typically, sukuk issuances are structured as corporate credit-risk instruments and in a
default and redemption scenario the sukuk holders would not have recourse to the assets
themselves. Redemption is typically effect by the sukuk holders exercising their rights against the
originator under a purchase undertaking. While sukuk certificates represent an underlying
ownership interest in an asset from a Shariah perspective, the commercial and economic reality is
that most issued sukuk are unsecured and equivalent to conventional bonds.5
IJARAH
The Ijarah contract is essentially a rental or lease contract that establishes the right to use
anasset for a fee. The basic idea of ijarah sukuk is that the sukuk holders (investors) are the
ownersof the asset and are entitled to receive a return when that asset is leased. Ijarah sukuk, give
the owners the right to own the real estate, receive rent and dispose of the sukuk in a way that
doesnot affect the right of the lessee. It is essential for ijarah that both the asset that is being leased
as well as the rent to be clearly specified to the parties when the contract is issued. Rental fees
must be expressed explicitly and formulated for the terms specified. Any expense incurred for
maintenance is borne by the lessee, whereas initial expenses are considered the responsibility of
the owner.
In ijarah, property or asset is purchased by the lessor on behalf of the lessee and usufruct
is transferred to lessee for an agreed price and at an agreed consideration. The subject of lease in
ijarah is not limited to building or machinery. It could be anything that contains some value, and
5
Latham and Watkins (2016), The Sukuk Handbook: A Guide to Structuring Sukuk, The Law Office of Salman M. Al-
Sudairi in association with Latham & Watkins LLP. Pdf

7
can be identified and quantified. Thus, anything that can be consumed such as money and food
items cannot be leased out. The lessor is liable for any damage or destruction of the subject of
lease during the period of lease. The period of lease must be determined in clear terms at the time
of sukuk contract. At the end of an agreed lease period, the lessee becomes the owner of the
property by purchasing it from the lessor during or at the end of the lease period at an agreed sale
price. In some cases, an amortization schedule is prepared to calculate a portion of each monthly
payment to be applied to reduce the purchase price of the lessor till the termination date of the
lease. The remainder of the lease payment is attributed to profit earned by the lessor. Upon paying
the purchase amount of the lessor, the lessee can be the sole owner of the property.6
There are mainly three parties involved in Ijarah: (i) the lessee, who will identify the
property it wishes to get, and who will pay rent towards earning ownership rights in the property
towards the end of lease agreement; (ii) the financier, which is the entity originating each
transaction; and (iii) the lessor, a special purpose entity wholly owned by the financier or its
partner/affiliate, which holds legal title in the property during the term of the financing and is the
lessor under the lease agreement.7
6
Usmani, Muhammad Zubair, (2013), Mudarabah, Al Huda, CIBE.
7
“Ijara Financing Program,” Zayan Finance, accessed March 6,
2013,http://www.zayanfinance.com/pdfs/sc/ZayanFinance_Ijara_White_Paper.pdf.

8
The structure of an ijarah sukuk is shown in Figure 1. The obligator or seller sells the special
purpose vehicle SPV certain assets at an agreed pre-determined purchase price. The SPV issues
sukuk certificates in an amount equal to the purchase price to raise financing. The proceeds from
the sale of the sukuk are applied to purchase the asset from the seller or obligator. A lease
agreement is signed between the obligator and the SPV for a fixed time period, where the obligator
leases back the assets as a lessee. SPV receives periodic rentals from the obligator which are then
distributed among investors or the sukuk holders. At maturity, the SPV sells the assets back to the
seller at predetermined price.8
8
Nisar, Shariq, (2010), “How Sukuk Work: Introduction, Structuring and Application ofSukuk Bonds,” accessed
February 14, 2013, http://ifresource.com/2010/04/27/how-sukukworks-introduction-structuring-and-application-
of-sukuk-bonds/.

9
3. Lease
agreement
2b. Sukuk
proceeds
4a. Periodic rentals
and capital amount
payments
1. Title to assets
Sukuk Holders
SPV
(Special Purpose
Vehicle)
Obligator as
seller
Obligator
leases back
asset as lessee
Same entity
4b. Periodic rentals and
capital amount
distributions
2a. Sukuk
proceeds

10
4.0 Types of Sukuk
Islamic finance products are becoming increasingly diverse because of the lack of progress
in globally standardizing rules in Islamic financial markets. Sukuk can be divided into 4 types
which is sales based, lease based, agent based and partnership based.

11
SUKUK MURABAHAH
Murabahah is a scheme used for purchasing equipment, products and other goods under
installment sales contract. When a client needs to purchase a good, the fund provider purchases
that good on behalf of the client and then resell it to the client on installment basis. Must disclose
clearly details of the transaction between the parties, setting all terms in advance including then
initial purchase price, resale price, fees and number of installments. The transaction to purchase or
sell the goods is conducted after agreement is reached. The basic structure murabahah of
murabahah sukuk shown in figure below.

12
SPV is established and a murabahah contract is signed with the originator wanting to buy
a product. All of the terms of the murabahah contract including the payment period, number of
payments, the amount of markup are determined ahead of time. The sukuk is issued afterward and
SPV acting as trustee for investors uses the funds thus obtained to purchases the product wanted
by the originator with cash and the resell it to the originator at the predetermined markup which in
turn funds the dividend paid to investors. This dividend is not interest generated by debt, but profit
generated from the sale of a product thus shariah compliant.
A commodity murabahah sukuk a type of murabahah primarily used in Malaysia recently,
is structured as figure below. The basic flow is the same as that of a plain sukukmurabahah, but
because the originator’s purposes in issuing a commodity murabahahsukuk is not to purchase
product as soon the originator gets possession of the product it sells it to a third party to raise cash.
Consequently, this scheme is often used for products in market with low volatility and high

13
Liquidity such as metals and grains. There are few restrictions on what can be used as underlying
asset for a commodity murabahah sukuk and products like metal that are broadly traded on the
London Metals Exchange (LME) offer flexibility in issuance amount.
SUKUK MUSHARAKAH
Musharakah could be view as partnership created through a joint investment. Islamic bank
(investor) can be jointly invest with a business operator in need of funding it is similar to a venture
capital financial services. It differs from its conventional equivalent as it is based on the concept
of prohibiting interest and sharing risk and return where the percentage allocation among investors
of profits and losses from business is determined ahead of time.

14
Although the business invested in jointly by the investors and business is managed jointly, the
musharakah contract agreed to at the outset often establishes the investor as silent partner without
any say in managing the business.
In sukuk musharakah, first SPV is established to issue the sukuk and enters into a musharakah
contract in order to operate the joint business together with the originator. The originator supplies
the equipment, technology and management expertise to operate the business and SPV invest the
funds obtained from issuing sukuk into the business backing the sukuk. Profit distributions to the
sukuk holders are made from the income generated by the business. The originator acquires the
underlying business at maturity and the proceeds are used to redeem the sukuk.

15
Theoretically sukuk musharakah holders are exposed to both profits and losses generated from the
underlying joint business. However, there are several mechanism that have been developed to fix
the yield for investors. For example in addition to the musharakah contract between originator and
SPV, a business consignment agreement is signed to allow the originator to operate the
musharakah business. The originator receives in addition to a fixed consignment fee, an incentive
payment equal to the amount by which profits exceed to a specified expected amount. Conversely,
if the originator unable to generate the expected amount of profit, it must make up the difference
which is subsequently repaid with an incentive payment due to profits exceeding the expected
amount going forward. In some cases any incentive payments received by the originator are held
in a segregated account until the sukuk matures, and when the profits from musharakah business
fall short of the expected amount, funds from that account are used to supplement dividend

16
payment until the sukuk matures. Opinions of Islamic scholars are split regarding whether this
method of fixing the yield is shariah compliant. Another way to fix the yield is SPV to purchase
the equipment that the originator invest in the business and lease them back to originator until the
sukuk maturity date. More Islamic scholars view this method of fixing the dividend payment as
shariah compliant.
SUKUK WAKALAH
Wakalah are agency agreements and are basically structured the same assets management
business in conventional finance. The investor provide funds to the agent called a wakil, and
wakil invest the funds on behalf of the investor.
Sukuk wakalah are based on an agency agreement and backed by investment assets, unlike ijarah
sukuk which require real assets. This makes them a scheme by which originators lacking real assets
can act as an issuer. Under the usual structure, an SPV is established to act as the trustee for investor
and enter into a wakalah agreement with the originator. Acting as the wakil, the originator takes
the fund collected from the sukuk holders and invest them in shariah compliant assets, which can
include for example sukuk owned by the originator claims based on murabahah contracts and
ijarah contracts. In this case, the resulting portfolio is also referred to as a wakalah portfolio.
Earnings from wakalah portfolio are paid to the sukuk holder as dividends. At maturity, the

17
wakalah portfolio is either purchased directly by the originator or sold to a third party, with the
resulting cash paid to the sukuk holder as redemption proceeds. The figure as shown below.9
9
Bedi Gunter Lackmann (2015), Types of Sukuk (Islamic Bonds) and History of Japanese Company Issuance,
Nomura Institute of Capital Market Research, Page 2 – 13. pdf

18
5.0 Differentiation between sukuk and bond
Modern sukuk emerged to fill a gap in the global capital market. Islamic investors want to balance
their equity portfolios with bond like products. Because sukuk are asset based securities not debt
instruments and they fit the bill. In other words, sukuk represent ownership in a tangible asset,
usufruct of an asset, service, project, business or joint venture.
Each sukuk has a face value based on the value of the underlying asset and the investor may pay
that amount as with a conventional bond or buy it at a premium or discount.
REWARDING INVESTORS FOR SUKUK
With sukuk, the future cash flow from the underlying asset is transferred into present cash flow.
Sukuk may be issued for existing assets or for assets that will exist in the future. Investors who
purchase sukuk are rewarded with a share of the profits derived from the asset. They do not earn
interest payments because doing so would violate shariah.
REPURCHASING SUKUK AT MATURITY
As with conventional bonds, sukuk are issued with specific maturity dates. When the maturity date
arrives, the sukuk issuer buys them back through a middleman called a Special Purpose Vehicle.
However, with sukuk the initial investment isn’t guaranteed, the sukuk holder may or may not get
back the entire principal/face value amount. That’s because unlike conventional bond holders,
sukuk holders share the risk of the underlying asset. If the project or business on which sukuk are
issued doesn’t perform as well as expected, the sukuk investor must bear a share of the loss.
Most shariah scholars believe that having sukuk managers, partners or agents promise to
repurchase sukuk for the face value is unlawful. Instead, sukuk are generally repurchased based

19
on the net value of the underlying assets (each share receiving its portion of that value) or at a price
agreed upon at the time of the sukuk purchase.
In practice, some sukuk are issued with repurchase guarantees just as conventional bonds are.
Although not all shariah scholars agree that this arrangement complies with Islamic law a product
called sukukijarah may come with a repurchase guarantee.
ENSURING SHARIAH COMPLIANCE WITH SUKUK
The key characteristic of sukuk is the fact that they grant partial ownership in the underlying asset
and is considered shariah compliant. This ruling means that Islamic investors have the right to
receive a share of profits from the sukuk’s underlying asset.
Table show that the differences between bond and sukuk that offers a quick look at the key ways
in which these investment products compare.
Bond Sukuk
Asset
ownership
Bonds don’t give the investor a share of
ownership in theasset, project, business, or
joint venture they support.They’re a debt
obligation from the issuer to the
bondholder.
Sukuk give the investor partial
ownership in the asset on which
the sukuk are based.
Investment
criteria
Generally bonds can be used to finance
any asset, project,business or joint venture
that complies with locallegislation.
The asset on which sukuk are
based must beshariah compliant.

20
Issue unit Each bond represents a share of debt. Each sukuk represents a share
of the underlying asset.
Issue price The face value of a bond price is based on
the issuer’scredit worthiness including its
rating.
The face value of sukuk is based
on the market value of
theunderlying asset.
Investment
rewards
and risks
Bond holders receive regularly scheduled
(often fixed rate) interest payments for the
life of the bond, and their principal
isguaranteed to be returned at the bond’s
maturity date.
Sukuk holders receive a share of
profits from the underlyingasset
(accept a share of any loss
incurred).
Effects of
costs
Bond holders generally aren’t affected by
costs relatedto the asset, project, business
or joint venture they support.
Theperformance of the underlying asset
doesn’t affect investorrewards.
Sukuk holders are affected by
costs related to the underlying
asset. Higher costs may
translate to lower investor
profits and
vice versa.10
10
FaleelJamaldeen, How Sukuk (Islamic Bonds) Differ from Conventional Bonds,
http://www.dummies.com/personal-finance/islamic-finance/how-sukuk-islamic-bonds-differ-from-conventional-
bonds/

21
6.0 Overview of Nomura Sukuk al-Ijarah
Nomura is a leading financial services group and the preeminent Asian-based investment bank
with worldwide reach. Nomura provides a broad range of innovative solutions tailored to the
specific requirements of individual, institutional, corporate and government clients through an
international network in over 30 countries. Based in Tokyo and with regional headquarters in Hong
Kong, London, and New York, Nomura employs over 26,000 staff worldwide. Nomura’s unique
understanding of Asia enables the company to make a difference for clients through three business
division: retail, wholesale and asset management.
On 6 July 2010, announced that it has appoint Kuwait Finance House (Malaysia) Berhad
(KFHMB) as the Meditated Lead Arranger (MLA) for proper issuance of two year Sukuk al-Ijarah
worth of USD100 million. This marked the first United States dollar-dominated sukuk for a
Japanese multinational corporation issued out of Malaysia under the Framework of Issuance of
Foreign Currency-Denominated Bonds and Sukuk Malaysia.11
The subscription Agreement was sign by Mr Takumi Shibata, Deputy President and Chief
Operating Officer of Nomura Holdings, Mr Akira Komichi, Director, NBB Ijarah, Encik Azizan
Mohd Som, Director, Nomura Sukuk and Chief Executive of Managing Director, Securities
Commission Malaysia and Dato’ Yusli Mohammed Yusoff, Chief Executive Officers, Bursa
Malaysia.
“With this landmark transaction, Nomura has further diversified its funding sources and
tapped the large and growing Islamic finance market for the first time,” said Takumi Shibata. “The
11
Nomura to Issue USD100 Million Sukuk Al-Ijarah, Press Statement, First Sukuk for a Japanese Multinational
Corporation Issued out of Malaysia, Corporate Communications Nomura Asia Holdings, pdf

22
issuance is part of Nomura’s ongoing push to diversify its funding sources to drive growth. Islamic
investors and Islamic finance are a very important and rapidly growing sector globally and this
transaction is highly significant for Nomura and for corporate Japan. Nomura has now opened the
way for other Japanese corporations to tap the Islamic finance market, and we believe that the
transaction will lead to significant benefits for Nomura and for our clients and partners.”
Explaining the milestone initiative, Puan Jamelah said, “Our cooperation with one of
Japan’s leading financial service groups demonstrates Nomura’s trust in KFHMB, and in the
strength of Islamic finance products. As one of the leaders in the sukuk and capital markets, the
Kuwait Finance House Group (KFH) has been involved in sukuk issuance for companies from a
wide range of industries worldwide. All our sukuk are structured under globally Shariah-compliant
principles. KFH has been in operation for over 30 years and our partners can benefit from our wide
pool of resources and significant network. For this Sukuk al-Ijarah, we are targeting investors from
Asia Pacific, the Middle East and London. At the same time, Nomura has worldwide operations
in more than 30 countries, and we hope to also reach out to its customer base.”
Puan Jamelah attributed the success to various investor road shows organized by Bank
Negara Malaysia (BNM) under the Malaysia International Islamic Finance Centre (MIFC) over
the last few years. “We support the Government’s call to position the country as an international
hub for Islamic finance which would in the long run contribute to the economic growth agenda
and social well-being of the people.”

23
7.0 Structures or Concepts of Nomura Sukuk Al-Ijarah
Structure of Nomura Holdings Sukuk
((1) Issuance)
Aircraft
Payment Sukuk Proceed from
Sukuk issue
Transfer of contract
Aircraft
Aircraft operating Payment
lease contract
Lease Agreement
1. SPVs were set up to issue a sukuk backed by aircraft.
2. Both the aircraft and the existing lease contract owned by the original owner
are sold andtransfered to SPV1.(In principle,shariah requires the transfer of
not only the rights to the asset but also the legal title.)
Nomura Holdings
Which
owned
subsidiary
Investors
NBB
Which
owned
subsidiary
Aircraft
owner
Airline
NBB Ijarah
Ltd.
(NBBI=SPV1)
Nomura Sukuk Ltd.
(Issuer/trustee)
(SPV2)

24
((2) Dividend Payment)
Guarantee
Dividend
Leasing Fee
Aircraft lease
Aircraft Lease
3. Investor do not receive interest paymens from SPV2, but instead receive
dividends funded by the income generated by the aircraft lease agreement
underlying sukuk.
4. Because shariah does not permit the fund raiser (Nomura) to directly
guarantee dividend payments to the investor, Nomura instead guarantees any
debt that SPV1 has to SPV2, including the lease fee.
Nomura Holdings
Which
owned
subsidiary
Investors
NBB
Which
owned
subsidiary
Airline
NBB Ijarah
Ltd.
(NBBI=SPV1)
Nomura Sukuk Ltd.
(Issuer/trustee)
(SPV2)
Leasing
Fee

25
((3) Redemption)
Guarantee
Sukuk Redemption Dividend
Payment
Aircraft Aircraft
5. When the sukuk matures, the aircraft is sold to SPV1 by executing the
previously signed purchase/sale agreement, and the proceeds from the sale
fund the redemption of proceeds paid through SPV2 to the investors.
6. Here as well, because Nomura is not allowed under shariah to directly
12
guarantee repayment of the sukuk principal, it instead guaranteed the
payment of funds by SPV1 to SPV2.
12
Nomura Institute of Capital Market Research, Page 16 - 18. pdf
Nomura Holdings
Which
owned
subsidiary
Investors
NBB
Which
owned
subsidiary
Airline
NBB Ijarah
Ltd.
(NBBI=SPV1)
Nomura Sukuk Ltd.
(Issuer/trustee)
(SPV2)
Payment

26
8.0 Issues on the Nomura Sukuk al-Ijarah
As already noted, it is estimated that Islamic financial assets worldwide will grow during
2014, with approximately 78% of these assets held by Islamic banks, and 16% in the form of sukuk.
This growth in Islamic finance can be explained primarily by the economic growth of Islamic
countries, growth in the average incomes of their citizens, and the rising interest in Islamic finance
from non- Islamic countries.13
Growth in the sukuk market can be explained by growth in the number of both Islamic investors
and non-Islamic investors (for purposes of returns, portfolio diversification, socially responsible
investing (SRI) via Islamic finance, and avoiding the impacts of the global financial crisis and
European debt crisis), increased investments by sovereign wealth funds (SWF) and pension funds
in Islamic countries, the progress many countries have made in building market infrastructure and
implementing reforms, including tax reforms that make it easier to issue sukuk, growth in
sovereign sukuk, and the increased use of sukuk as a way to fund large- scale infrastructure
construction and development projects in Islamic countries. Furthermore, in certain respects the
implementation of Basel III has encouraged sukuk issuance.
As a result, it create a several critical issue to enabling sukuk issuance in non-Islamic countries are
first to legally recognizing sukuk issuance and ensuring the stability of laws regarding sukuk and
second to lowering sukuk-related costs to competitive levels by taxing them at the same rate as
conventional bonds.
13
Nomura Institute of Capital Market Research, Page 19. pdf

27
Although Japanese companies are becoming more interested in sukuk, there has yet to be a sukuk
issued in Japan, despite domestic sukuk (J-sukuk) issuance having been legally possible since
April 2012. Possible reasons for this are when using a basic scheme such as ijarah, the issuance
amount is limited by the market value of the underlying assets, not many companies own the
sharia-compliant assets needed to back a sukuk issuance, there is a lack of companies with the
necessary expertise (legal, accounting, and sharia-compliance assessment) to issue a sukuk or to
provide consulting services (in Japanese) on issuing sukuk. Sukuk have higher issuance costs than
conventional bonds, and their issuance process takes longer (generally 12 to 20 weeks), and
domestic investors have no incentive to invest if sukuk yields are not set higher than conventional
bond yields because the dividends received from a sukuk get the same tax treatment as the interest
on a bond, and thus issuers who want to raise yen funds with a sukuk wind up being reliant on
finding Islamic investors overseas with a desire to invest in a yen-denominated sukuk. Thus issuing
corporate sukuk in Japan remains difficult for several reasons.

28
9.0 Recommendation
In contrast, outside of Japan there have been a number of sukuk issues from Japanese
companies in recent years (see above). Following Aeon, UMWTC, and Nomura Holdings, in
September 2014 The Bank of Tokyo-Mitsubishi UFJ issued sukuk in Malaysia. It has also been
reported that Aeon now is considering issuing a perpetual sukuk in Malaysia20. A common trait
of the Japanese companies that have used sukuk to raise funds so far is that they are all operating
Islamic financial businesses overseas.
A critical issue for Japanese companies issuing sukuk is sharia compliance. As already
noted, differences of opinion among Islamic scholars on whether a sukuk is sharia compliant are
a potential source of problems, particularly in the case of cross- border issuance. It is fairly easy
to raise funds by issuing sukuk in Malaysia, for example, because the country has enacted
comprehensive relevant legislation. For domestic issuance, however, fund raising is primarily done
in ringgit, and that is not necessarily a currency that is in great demand among Japanese issuers. If
raising funds to finance a local business, the locally-denominated funds can be used as is, but if
not, the funds must be swapped for the needed currency, and consideration must be given as to
whether the sukuk is still a competitive funding method after the swap.
On the other hand, when issuing sukuk internationally and with the approval of Islamic
scholars and Islamic investors worldwide, as Nomura Holdings did, there is a risk that the fees
paid for sharia advisory services on structuring and accounting/legal advice regarding type of
issuance will be higher than they would be for a domestic issue. Thus sukuk come with constraints
from both currency and cost.

29
10.0 Conclusion
Basically, the shift towards Islamic Capital Market has forced developers to pay
attention towards investors. Providing products with big profitable return is no longer
sufficient , satisfying customer’s effective needs has become increasingly important in the
current Islamic economic systems.
This study reviewed and analyze different Sukuk structures in the context of
Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), Shariah
ruling. Besides, we also evaluate the importance of Shariah Advisory in regulating
Islamic Capital Market. The result of the study that the crucial role of Shariah Advisory
in monitoring of Islamic products.
Despite this, sukuk could become an important method for funding the expansion of
business in the Islamic world for Japanese companies. Nearly half of the population of ASEAN,
and a quarter of the world’s population is Muslim. The Muslim population is growing fast, and
expected to reach 2.2 billion in 15 years.
Furthermore, the global weighting of Islamic markets will increase in step with income
growth in Islamic countries, because most Muslims consider it preferable to use sharia- compliant
capital to fund halal businesses.
Aeon, Toyota Motor, Nomura Holdings, and The Bank of Tokyo-Mitsubishi UFJ have
been pioneers in the international sukuk market, and they are likely to be followed by other
Japanese companies working to increase their presence in Islamic markets in Southeast Asia and
elsewhere.

30
Even though the founder of Nomura Holdings is not a Muslim, but he trusted and
applied the Islamic Capital Market’s product. We as a Muslim, should be confident and
support our own Sharia compliant capital market in developing business. It could be a
great competitors for us especially in Islamic Capital Market but in a bright side, we
should be proud that non-muslim accept an Islamic Capital Market a great product to apply
in the business.

31
11.0 References
Clifford Chance, Introduction to Sukuk, Clifford Chance Limited Liability Partnership
September 2006. Pdf
Obiyathulla I. B. and A. Mirakhor (2013), Sukuk and Sukuk Market: What are Sukuk?, Islamic
Capital Markets A Comparative Approach, John Wiley & Sons Singapore Pre. Ltd,
Singapore
Jabeen, Zohra, Significance of SukukSecuratization for Banks Structuring Risk Regulation and
Pricing, Institute of Management Sciences, Peshawar, Pakistan, pdf.
Mona R. El Shazly and Pragya Tripathy, Sukuk Structures, Profiles and Risks, Columbia
College. Pdf
Usmani, Muhammad Zubair, (2013), Mudarabah, Al Huda, CIBE.
“Ijara Financing Program,” Zayan Finance, accessed March 6, 2013,http://www.zayanfinance.
com/pdfs/sc/ZayanFinance_Ijara_White_Paper.pdf.
How Sukuk (Islamic Bonds) Differ from Conventional; Bonds. Retrieved December 19,2016,
from http://www.dummies.com/personal-finance/islamic-finance/how-sukuk-
islamic-bonds-differ-from-conventional-bonds/
Five important Differences Between Sukuk and Tradisional Bonds. Retrieved December 19,
2016, from https://www.sukuk.com/education/important-differences-sukuk-t
radisional-bonds-2207/
Bedi, G. L. (2015) Types of Sukuk ( Islamic Bonds) and History of Japanese Company Issuance
articles. Journal of Nomura Institute of Capital Market Research, 2-18.

32
“Malaysia’s ICM: A Success Story”, contributed by Securities Commission, Malaysia, published
in Islamic Finance, August/September 2008.
“Asian Sukuk Market Faces New but Familiar Challenges” by Islamic Finance News, published
in Islamic Finance News, Vol. 6, Issue 16, 24 April 2009.

Understanding Nomura Sukuk Al-Ijarah

Recommended

Recommended

More Related Content

What's hot

What's hot (20)

Similar to Understanding Nomura Sukuk Al-Ijarah

Similar to Understanding Nomura Sukuk Al-Ijarah (20)

More from Nur Adillah Arifah Nazri

More from Nur Adillah Arifah Nazri (9)

Recently uploaded

Recently uploaded (20)

Understanding Nomura Sukuk Al-Ijarah